COLORADO FOCUS: Stocks to Watch Prior to Midterms

Stocks to watch for as Colorado's ballot initiative 97, which would expand setback requirements for oil and gas operators, is decided. If passed, initiative will take off the table about 50% of land. Some predict that Colorado's oil production will dip by as much as 50% within the next five years.

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Stocks to watch for as Colorado's ballot initiative 97, which would expand setback requirements for oil and gas operators, is decided. If passed, initiative will take off the table about 50% of land. Some predict that Colorado's oil production will dip by as much as 50% within the next five years.

I have had the ongoing experience of being in CO and operating several energy and non energy related businesses and investment fund sin CO for the past 15 years and the environment for energy specially oil and gas operations has been going downhill "progressively" since 2009 and onwards. The push for anti-hydro-fracturing was so intense and ugly and always lead by loud mouth, hate filled bullying by so called average people. Their claims were so absurd and their tactics of harassing, threatening and bullying anyone and everyone who had a different opinion is reminiscent of what is happening today nationwide by the like minded groups. Factual data and science meant nothing, it was just NO, NO, NO and if you were for it in the industry, you were baby killers, polluters of air, water and food. The hypocrisy knew no bounds. They would go protest oil and gas development using fossil fuels and they wanted to ban hydraulic fracturing for oil and gas and yet they used the very same resources to get to work, heat and cool and have everything made possible by oil and gas. It was ugly. Dont forget that during that time period under the leadership of the "community organizer", Russians were pouring in millions of $$$ to fund the anti oil and gas propaganda and initiatives within the US , using lobbying firms and shell companies. Gazprom was one of the biggest funding source of these propaganda machines and the outright lies and disinformation being spread. Some of the anti HF movies were backed by these funds coming from Russia. And that was also meant to energize these people at times of the elections for county and state offices. Election interference!!

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I have had the ongoing experience of being in CO and operating several energy and non energy related businesses and investment fund sin CO for the past 15 years and the environment for energy specially oil and gas operations has been going downhill "progressively" since 2009 and onwards. The push for anti-hydro-fracturing was so intense and ugly and always lead by loud mouth, hate filled bullying by so called average people. Their claims were so absurd and their tactics of harassing, threatening and bullying anyone and everyone who had a different opinion is reminiscent of what is happening today nationwide by the like minded groups. Factual data and science meant nothing, it was just NO, NO, NO and if you were for it in the industry, you were baby killers, polluters of air, water and food. The hypocrisy knew no bounds. They would go protest oil and gas development using fossil fuels and they wanted to ban hydraulic fracturing for oil and gas and yet they used the very same resources to get to work, heat and cool and have everything made possible by oil and gas. It was ugly. Dont forget that during that time period under the leadership of the "community organizer", Russians were pouring in millions of $$$ to fund the anti oil and gas propaganda and initiatives within the US , using lobbying firms and shell companies. Gazprom was one of the biggest funding source of these propaganda machines and the outright lies and disinformation being spread. Some of the anti HF movies were backed by these funds coming from Russia. And that was also meant to energize these people at times of the elections for county and state offices. Election interference!!

BTW , the Russians were using their money to carry out the same anti HF propaganda and protests in Europe too, Germany, Poland, Italy, France, Spain, UK etc

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Stocks to watch for as Colorado's ballot initiative 97, which would expand setback requirements for oil and gas operators, is decided. If passed, initiative will take off the table about 50% of land. Some predict that Colorado's oil production will dip by as much as 50% within the next five years.

On Nov. 6, voters may spoil BP’s welcome. That’s when Colorado decides whether to limit drilling in an initiative that has drawn almost $39 million in campaign finance contributions. If passed, the proposition would cut the state’s oil output by more than half and, perhaps, act as a potential blueprint for blocking development elsewhere.

BP moved its office from Houston weeks before the proposition hit the ballot. Colorado has been drawing drillers whose interest has been piqued by production that’s climbed 10-fold since 2001 to a record 450,000 barrels a day in April. Along with Noble Energy Inc., Anadarko Petroleum Corp. and others, BP is now in the midst of a multimillion-dollar war over the state’s environmental future.

“The long-term impact is quite significant,” said Matt Andre, an energy analyst at S&P Global Platts. “It’s about the precedent being set, and it working its way to other states.”

At issue is Proposition 112, which requires that new drilling sites, processing plants and gathering lines be more than 2,500 feet from homes, schools and other “vulnerable” areas. In effect, it makes 54 percent of surface land inaccessible to producers.

If the measure passes, production could fall 55 percent by 2023, according to an S&P analysis. But Andre sees that as just a best-case scenario: “It assumes that people who can drill will drill,” he said. “But you have to imagine that some people will move to other plays.”

The stakes are extraordinarily high. By July, Colorado overtook Alaska to become the nation’s sixth-largest oil producer. In 2016, the government estimated that the state had 1.3 billion barrels of proved oil reserves.

The vote’s in a few weeks. In the meantime, the latest campaign filings show opponents to the proposition have put $37.8 million into defeating it, including $300,000 contributed by BP on Oct. 2, and about $6 million each overall from Anadarko Petroleum Corp. and Noble Energy Inc.

That compares with just $921,000 raised by proponents. The latest polling by Height Securities LLC showed support for the measure at 43 percent and opposition at 47 percent, based on a survey conducted Oct. 15 and Oct. 16.

These companies “don’t just have to win,” said Ethan Bellamy, a senior analyst at Robert W. Baird & Co Inc. “They have to win by a mile to take the risk overhang out of the stocks. If Proposition 112 wins, the stocks will get torched.”

BP isn’t the only company to show renewed interest in Colorado, even amid efforts to restrict development in the state. Wyoming gas producer Ultra Petroleum Corp. in September moved its headquarters from Houston to Denver, part of a plan to consolidate operations.

Even Noble, which last year shifted operations to Texas, has reallocated activity back to the Denver-Julesberg basin amid pipeline bottlenecks expected to slow growth in the prolific Permian Basin.

Significant Blow

For Denver-based companies with operations outside the state, such as BP, opposing the ballot measure is a matter of principle. But for pure-play producers the proposition could be a significant blow. Independent explorers Extraction Oil and Gas Inc., PDC Energy Inc. and SRC Energy Inc. all saw their shares fall after Colorado put Proposition 112 on the ballot.

Some companies are doing what they can to mitigate the impact of the measure.

Highpoint, for instance, is evaluating the drilling of longer laterals, Chief Financial Officer Bill Crawford said. Others are rushing to secure drilling permits ahead of the vote. Extraction Oil & Gas anticipates having more than three years of drilling inventory permitted and “ready to go” if the measure passes, Chief Executive Mark Erickson said on a second-quarter earnings call.

Anadarko, which holds 400,000 acres in the D.J. basin, has already announced plans to trim new production in the region, even before the measure made it onto the ballot.

‘Uncertainty’

A BP spokesman declined to comment on what impact if any, the measure might have on that company. BP opposes the proposition, like its fellow producers, and its Lower-48 unit plans to increase its share of oil production, amid low gas prices. But it hasn’t announced new exploration in the state.

The company now operates more than 1,300 wells in the Colorado portion of the San Juan basin but is weighing selling those assets following its $10.5 billion acquisition of most of BHP Billiton Ltd.’s onshore U.S. fields. It also owns and operates a natural gas plant near the New Mexico border that can process as much as 280 million cubic feet a day.

Politically, BP is trying to straddle both sides. While the company opposes the ballot measure, it casts itself as broadly supportive of Denver’s environmental goals.

“This is a city and a state that cares about the environment -- we see ourselves as a partner in that,” said Dave Lawler, chief executive of BP’s Lower 48 unit, in an interview last month. “This is one of the many steps of how we’re transforming the company.”

Lawler insisted that the Denver office is here to stay, regardless of the referendum’s outcome or the potential sale of BP’s holdings. The decision to relocate to Denver rested largely on the state’s “entrepreneurial mindset,” he said. “And in Denver, certainly, a technology emphasis that we want to be part of the company long-term.”

To contact the reporter on this story: Catherine Traywick in Denver at ctraywick@bloomberg.net. To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Margot Habiby, Reg Gale.

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On Aug.29, 2018, the office of Colorado Secretary of State Wayne Williams announced that a setback measure for oil and gas development made the November ballot. The measure, if passed, would mandate that new oil and gas development, including hydraulic fracking be a minimum distance of 2,500 ft from occupied buildings and other areas designated as “vulnerable.” The current minimum setback of drilling and completing oil and gas wells is 500 ft from homes and 1,000 ft from schools.

The measure comes 18 months after a home explosion that occurred last year in Firestone, Colo., that killed two men. The incident was blamed on a leaky flowline from a nearby well owned by Anadarko that hadn’t been capped properly. Supporters of the initiative say there have been 13 explosions and fires since then.

Backers of Initiative 97, which include instate green groups such as Colorado Rising and Colorado Sierra Club, submitted signatures on Aug. 6, 2018. The Colorado Secretary of State confirmed that the number of required signatures met the threshold to get Initiative 97, now officially Proposition 112, on the November ballot. However, the measure is facing widespread opposition from political leaders on both sides of the aisle, as well as the oil and gas industry. Colorado governor candidates Jared Polis (D) and Walker Stapleton (R), as well as outgoing governor John Hickenlooper (D), are all on the record opposing the proposal.

To put into perspective what the state would be dealing with, Figure 1 shows Colorado’s population density (per the 2010 United States Census Bureau) along with active horizontal drilling permits by major oil and gas basins in Colorado.

Of all the basins in Colorado producing hydrocarbons, major exploration and production operators in the Denver-Julesburg (D-J) Basin would experience the biggest setback. The core of the D-J Basin sits north of Denver and is primarily located in southwest Weld County. According to the Colorado Oil & Gas Conservation Commission (COGCC), Weld County accounted for about 91% of the state’s oil production, producing over 119 million barrels (MMbbl) of oil in 2017, equating to around 330,000 bbl/d.

Since January 2016, there have been 6,995 horizontal drilling permits filed, 6,029 of which are in Weld County. Each of these drilling permits are to be associated with completion techniques that involve hydraulic fracturing stimulation in order to produce commercial quantities of oil and gas.

Figure 2 depicts the core D-J Basin with major city boundaries along with a 2,500-ft buffer that is to be used as a reference for Proposition 112, but does not by any means show the true extent of the potential repercussions that this measure would create. Despite considerable oil and gas development on rural lands in Weld County, one cannot fully portray the effect this bill would have on the oil and gas industry in Colorado. What this map does not show are the parks, the streams and occupied buildings that are distant from the city boundaries that would be designated as “vulnerable areas.”

According to the Colorado Oil & Gas Association (COGA), the measure will slash nearly 148,000 jobs and would eliminate about 94% of non-federal land in Weld County from future drilling—the area where the majority of oil and gas activity is occurring in the state. According to the American Petroleum Institute (API), the measure, if passed, “could devastate the economic livelihood of hundreds of thousands of Coloradans, both in and out of the energy industry.”

In addition, the new policy would effectively eliminate oil and gas severance tax revenues, which would be a major blow to the state’s economy while also hurting the counties that use this money to fund schools, infrastructure costs and other amenities—not to mention the headache the state would have to contest, and arguably compensate, for the many claims that would arise from lowering the appraisal value of one’s land by essentially banning the production of oil and gas.

The measure is creating uncertainty for oil and gas companies. If passed, it would have a meaningful impact on earnings for upstream and midstream companies that operate in the state. However, it is hard to imagine that such a bill would pass in the seventh- and fifth-largest crude oil and natural gas-producing state in the U.S., respectively, according to the EIA. The profound negative impact this measure would have on the economy is something the state and local governments would feel almost instantly.

What does this mean for oil and gas going forward? It’s a good question and no one really knows. But, one thing is certain: groups such as Colorado Rising and Colorado Sierra Club are making their presence known. If this bill does not get passed, expect the current minimum setbacks from oil and gas development to slowly increase.

Ryan Long is a Geoscience Technician for Ralph E. Davis Associates, an Opportune LLP company, based in Houston. Chad Bourne also works for Ralph E. Davis, and continues to advance his entry-level position by assisting in reserve evaluations, field development studies and certifications for public filings.